What is the PESTEL matrix? It is an acronym for: (Political, Economic, Sociological, Technological, Environmental, and Legal), it is a strategic analysis tool that allows a company to identify and measure the influencing factors that may affect its operation and development.
PESTEL: what is it for? Why use this method?
PESTEL analysis helps to understand how the market works. By monitoring opportunities and threats to its operations and markets, the company can anticipate the evolution of the environment and thus ensure the sustainability of its operations.
For example: an existing company wants to diversify its activity and develop a brand new tool. It will be necessary to analyze the market from all PESTEL angles to ensure that barriers to entry are not blocked. That is to say, if it is a favorable or promising market, according to 6 criteria: Political, Economic, Sociological, Technological, Environmental and Legal.
Here are some examples of what you can find. 👇
PESTEL: The political analysis
In the political analysis of a country, we will be able to check if there are any conflicts or geopolitical tensions. Clearly, all the governmental and institutional decisions could influence in any way the market in which we want to establish ourselves.
The political stability of the county, region, or state can have a greater or lesser impact on the operations of a company and strategic decisions must be made accordingly.
💡 For example, Coca-Cola is temporarily leaving Russia during the war in Ukraine.
Decisions by international or European organizations can also change markets. The tax burden imposed by the state is also a factor to consider for a company, as it can play an important role in choosing its legal status.
💡 For example, the corporate tax rate is 10% higher in France than in Poland. Enough to think twice before choosing in which country you want to develop a market.
PESTEL : Economic analysis
Economic analysis is about the financial factors that dominate or influence the market.
Inflation and monetary stability are macro factors to be taken into account, especially for a company that operates internationally. The growth rate of the market should also be monitored, referring to statistics provided by reliable sites like INSEE. Moreover, the meteoric growth of certain prices must be considered, especially when they are raw materials or directly linked to the company’s activity.
💡 For example:
- The price of gasoline and gas has doubled in several countries (France, England),
- The depreciation of the Euro, which is now at parity with the dollar. 💰
The entrepreneur can apprehend the “health” of the market, in an external context, in the same way, that he apprehends the “political health” of the country. The interest rates charged by banks are one of the most important economic factors, especially for a company that borrows frequently.
💡 For example, interest rates on loans go from around 9% in 1980 in the Bahamas and Qatar to around 4% today. In the USA, loan interest rates range around 3.3%.
(Analysis 2021, World Bank).
PESTEL: Social analysis
The social or socio-cultural analysis is the one that will evaluate the behavior of the population in front of the market.
For this type of analysis, we must first identify the type of population:
- Age and evolution curve: Many births? Aging population? The health of the population overall?
- Occupations: Developed agricultural occupations? Huge urban-rural divide?
- Gender: Many more men than women?
Then, it is necessary to understand the habits and consumption trends of the population. Consumer expectations are constantly changing, often altering market behavior.
💡 For example, in 2022, European consumer trends are aligned with new values: transparency, ethics, and respect for the environment.
The PESTEL is a macroeconomic analysis of the global market. In a second step, the entrepreneur performs a microeconomic analysis (within his activity) and there he will be more precise in his analysis. To identify population groups, entrepreneurs must first segment their markets by creating personas.
PESTEL: Technological analysis
This consists of two points: The tools available in the market in which the entrepreneur wishes to enter and the impact of innovations on market performance.
Automation, big data, artificial intelligence, and the growth of communication channels are just some of the factors changing the way the market is approached and the feasibility of certain projects. The presence of patents is also an important point, which can transform the operations of a company.
The analysis of the market focuses on the technological resources available.
💡 For example, the United States has more resources and new technologies than many other countries, especially poor countries. Computer schools are also more equipped.
Then we will carry out a watch on the innovations of the market in which we want to establish ourselves, in a global way. As a reminder, the PESTEL analysis is a macroeconomic model. So we don’t necessarily look at the data of a particular market, but “the market” as a whole.
💡 For example, 5G development, internet access.
PESTEL: The environmental analysis
This is the evolution of environmental considerations.
Laws that promote sustainability and environmental friendliness have some impact on business operations. Entrepreneurs may choose to focus part of their efforts on this factor and thus use environmental constraints as an opportunity to demonstrate their environmental sensitivity. Social developments in France show that consumers have an increasing affinity with environmentally friendly companies.
💡 For example: In France, from January 1, 2022, a new law on ecology and circular economy has come into force: the “ban on the disposal of unsold non-food items”. There is then an opportunity (also called strategic factors), that of opening a business that recovers the non-food unsold goods that stores want to get rid of, to resell them at a price-defying competition.
Find here the list of changes in environmental laws in USA this year, in order to identify the potential strengths or weaknesses of a market.
PESTEL: Legislative analysis
Impact of employment-related rules and “general” laws of the country, e.g. labor law, commercial law, and safety standards…
The legal factors immediately determine the functioning of a company and its growth. These are laws that can protect employees (limitation of overtime, respect for safety), but also laws related to trade and marketing of certain products.
💡 For example, LAW to Protect veterans in the US (2013), These labor laws seek to protect veterans and individuals who may have disabilities.
These laws can therefore concern the world of work in general, but can also be very specific depending on the type of market you want to enter. The food industry, for example, is extremely regulated (cold chain, hygiene, expiration date…).
As a reminder, in a PESTEL analysis, we look at the market as a whole, and not a specific market. For this, we use Porter’s 5 forces.
How to do a PESTEL analysis?
To perform a PESTEL analysis, we will expect a table from you, separating the 6 axes of the model: Political, Economic, Sociological, Technological, Environmental and Legal.
You can then copy and paste this table into an Excel or Word document and fill in the information according to the market you are analyzing.
If you want to go further in your analysis, you can choose to a “focus” on the market you are targeting. Let me explain:
- Analysis of the Macro environment = PESTEL. The “global” market, i.e. the economy in France for example.
- Meso-economic analysis = Porter’s 5 forces. The market in which you want to establish yourself. For example the automobile market, and the sock market. 🧦
- Analysis of the Microenvironment = Strengths and weaknesses. Internal resources of the company to meet the needs of the market.
- Overall synthesis of the economic analysis = SWOT. Compares strengths and weaknesses and opportunities and threats to identify areas of improvement and areas of differentiation for the company.
To go further in your PESTEL analysis, you can associate to your table, the meso economic analysis of external(or competitive) factors, as below. Copy/paste table. 👇
|PESTEL analysis||Porter’s 5 Forces Analysis|
|Macroeconomic analysis||Meso-economic analysis|
|Political||Threat of new entrants|
|Economic||Bargaining power of customers|
|Social||Threat of substitute products|
|Technological||Negotiating power of suppliers|
|Ecological||Degree of rivalry with competitors|
Conclusion: better understand the market
In order to better understand the market, it is recommended to do the PESTEL analysis, Porter’s analysis and SWOT analysis.
Other tools are of course available to complete and refine the analysis, such as the creation of a business plan. The steps are quite simple to remember: First, the market is analyzed in a broad sense (Macro), then closer and closer (Meso) and finally internally (Micro). In the case of a business creation, we will analyze the opportunities and threats of the market, then the strengths necessary to meet the needs of consumers and finally, the possible weaknesses that we will encounter at the beginning (lack of qualified personnel, lack of expertise ..), we will then seek to feed the strengths and reduce the weaknesses.
To better understand the market and develop your business strategy, you will need to conduct an internal and external analysis.
Faq of the article: When, How, and Why to analyze the market?
When to do a macroeconomic analysis?
The external diagnosis is the very first analysis you need to perform to understand the market. You will know directly if there is a blocking point to the addition of a new company or a new product. The PESTEL allows you to identify very quickly if the market is promising for the type of product or business you want to implement.
Then you will have to carry out an internal diagnosis.
What are the 6 elements of PESTEL?
The 6 elements that make up the PESTEL method are the following:
How to fill in the PESTEL analysis table?
In order to fill in the external analysis table, you must first identify the market you want to operate in. For example “The industrial market in France” or “The agricultural market in Paraguay”. You can use the different examples found in this article to start filling in your PESTEL. Then, you search for information about these markets online. Of course, your sources must be reliable, so give preference to legal texts.